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The future of solar energy in Malaysia received a powerful boost on June 16 with the commissioning of the country’s largest solar power plant to date. The project’s operator, Malaysia-based Amcorp Group, awarded the production of the power plant’s solar panels to Chinese manufacturer Yingli Green Energy Holding Company. The project spans an area of almost 14 ha and will require some 40,000 photovoltaic (PV) units, which are estimated to produce 13.6m KWh of electricity annually.

While Amcorp Group’s decision to commission Yingli Energy is a testament to China’s dominance in the field of solar panel production, Malaysia is quickly gaining a reputation as one of the region’s leaders in renewable energy production.

In January, plans were unveiled for the installation 19 MW of solar energy units at Kuala Lumpur International Airport. Malaysia Airports’ managing director Bashir Ahmad told Renewable Energy News, “Rooftops, parking lots and ‘buffer’ areas at airports are traditionally not multi-purpose facilities, but we’ve turned them into a clean energy generation facility. This initiative also demonstrates our support towards the government’s initiative in introducing renewable energy and also to further reduce our carbon footprint.”

Pro-solar policy

Malaysia’s increasing momentum in the renewables arena is also attributed to a generous feed-in tariff (FIT) policy which requires energy providers such as Tenaga Nasional and Sabah Electricity to purchase power from Feed-In Approval Holders (FIAHs) at a rate that ranges from RM0.85 ($0.02) to RM1.23 ($0.38) per kilowatt produced. The FIT system is part of a larger development initiative set forth by the Malaysian government in June 2010, the 10th Malaysia Plan, which targets 5.5% of energy production to be derived from renewable sources by 2015 and 11% by 2020.

A tariff war currently taking place between solar panel producers in China and the US has further strengthened Malaysia’s growing status in the solar power arena. Chinese producers face US import duties of between 18% and 35% on solar panels, a response to US allegations that Chinese solar panel manufacturers have dumped their products into the US market.

To bypass the tariff, Chinese PV cell producer Comtec Solar Systems has opted to move its manufacturing operations to Malaysia. “We have been considering producing in Malaysia for over a year because we have a major customer there, but now our main consideration for moving there is to avoid trade barriers in our main markets,” John Zhang Yi, CEO of Comtec Solar, told the South China Morning Post.

The question of efficiency

As a nation historically known for an abundance of natural resources including oil, gas, hydropower and coal, the decline in hydrocarbons reserves in recent years has reinforced a national desire to secure renewable energy sources. Solar energy has proven to be chief among the renewables with a market share of 43%, followed by small hydropower (26%), biomass (26%) and biogas (5%).

As with any industry in relative infancy, technological efficiency remains a topic of debate among those for and against solar power production. The amount of energy produced per solar panel, a maximum of about 33.5% efficiency, is still a concern for many looking to invest in the technology. In comparison to conventional energy sources, the cost of solar power is relatively high.

While Malaysia’s FIT system claims to take the high cost of solar panel installations into account when considering what it takes to see a return on investment, the rates received by the FIAHs are dependent on the date of installation. Those that installed PV equipment at earlier times will receive higher rates than those which do so later on. This is based on the assumption that the price of solar technology will decrease as it becomes more efficient and widely available.

A strong showing by Malaysia’s tourism industry in the first three months of the year may be offset by an expected drop-off in arrivals from China. But officials and travel bodies remain confident that any cooling in sentiment from the mainland will ease by the latter part of the year, giving the sector a lift in the final quarter.

The tourism industry posted arrivals up 10% year-on-year for the first quarter of the year, with just over 7m visitors, up from 6.5m for the same period in 2013, according to data issued by the Immigration Department of Malaysia in mid-June.

Fellow ASEAN members continued to provide the bulk of Malaysia’s inbound visitors, contributing 72% of the total – 5.1m arrivals – with Vietnam, Thailand, Cambodia, the Philippines and Singapore all showing double-digit increases for the quarter. Indonesia, the second-largest source of tourists, delivered 676,000 passengers that represented a 7.3% increase.

Malaysia will need to maintain this rate of growth if it is to reach the aim of 36m annual arrivals set by the government for 2020, more than 10m up on the 25.7m arrivals recorded last year. The government is also looking to greatly expand tourism revenue, targeting earnings of $52bn annually by the end of the decade, more than two and a half times the 2013 total of $20.3bn.

Headwinds cooling Chinese interest

Despite the good performance, the real proof of the resilience of the tourism sector will come with the release of the second quarter figures, with a number of factors set to have a negative impact on performance.

The disappearance of Malaysia Airlines Flight 370 on a flight from Kuala Lumpur to Beijing in March, with 239 passengers and crew – many of the former being Chinese nationals – combined with the kidnapping of a number of Chinese nationals in Sabah recently, has hurt Malaysia’s standing as a tourism destination in the eyes of many potential travellers from China. Some estimates put the drop in arrivals from mainland China at around 40% since the incidents, putting at risk the industry’s target of hosting 2m Chinese tourists this year compared with 1.4m arrivals in 2013.

Tourism and Culture Minister Datuk Seri Nazri Aziz told Parliament in June that a total of 76 flights to Kota Kinabalu, the capital of Sabah, from China were cancelled recently in response to three kidnapping cases on the east coast of the Malaysian state in three months.

Another factor that could impact Chinese visitor numbers is the simmering tension between Beijing and a number of countries in the region, including Malaysia, relating to territorial disputes in the South China Sea and elsewhere. These tensions have seen at times violent anti-Chinese protests in Vietnam and while sentiment in Malaysia is not as heated, some Chinese tourists may look further when planning their holidays, away from any states in which their government is at odds.

Promotional push

Malaysia is now moving to shore up its Chinese market, having curtailed promotional activity in the wake of the Flight 370 disaster. Tourism authorities are again starting to increase advertising activities and attend trade fairs.

Speaking in Hong Kong in early June, Azizan Noordin, the deputy director-general of promotions for Tourism Malaysia, said he remained confident Chinese arrivals would hit 2m this year, representing a 15% increase year-on-year. Echoing these comments, the Malaysia-Chinese Tourism Association, a group representing Malaysian Chinese travel agents, predicts that arrivals from China are likely to rebound in the third quarter and into the last three months of the year while officials are confident year-end targets will be met.

But it remains unclear how deeply the loss of Flight 370 and the kidnappings in Sabah impact Chinese sentiment in the second quarter and beyond.

In for the long haul

Visitor numbers from China may well fall short of expectations for 2014, but this gap may be bridged by holidaymakers from other countries seeking an alternative to troubled Thailand.

Malaysia’s tourism appeal is spreading further with visitors from countries such as Australia a target. Though only representing a fraction of the overall total, long-haul visitors from countries in Europe or North America added significantly to Malaysia’s arrival numbers, with 500,000 landing in the first three months of the year, according to the Immigration Department. While only 8% of all arrivals, these long-haul markets represent an area of strong growth potential, one that has been given increased support by improved flight connections to Europe in particular.

Another more distant market that both the government and operators are working to expand is in the Middle East and other predominantly Muslim markets. Muslim visitors to Malaysia were estimated to account for a fifth of the total last year. This amounted to 5.2m according to the Islamic Tourism Center, an almost four-fold increase on the 2000 figure. By building on its credentials as a Muslim-friendly destination, Malaysia should be able to further broaden its tourism base.

A tourism leader in the region, Malaysia has seen its position challenged in recent years as nearby rivals have stepped up efforts to attract more visitors.

Official statistics show that just over 25m visitors arrived in 2012, a rise of around 300,000 compared to the prior year. Despite this increase, Malaysia saw its ranking fall on the 2012 UN World Tourism Organisation (UNWTO) list of most-visited countries, published in August. The country dropped one place on the UNWTO ladder to 10th, being overtaken by Russia.

The sector nonetheless remains a major source of foreign currency earnings, second only to the manufacturing industry, as well as the seventh-largest overall contributor to the national economy. The 2013 World Travel and Tourism Council report noted that tourism employs 1.7m people, or 13.6% of all jobs, when taking into account positions indirectly supported by the industry.

While the 1.3% increase in the number of visitors was a modest improvement on the 0.6% rise recorded in 2011, growth in the market has been slow in comparison to Malaysia’s neighbours. Thailand saw arrivals go up 16% last year, and fast-movers Cambodia and Vietnam posted increases of 24% and 14%, respectively, though both are coming off a far lower base.

In terms of arrivals, Malaysia remains number one in the South-east Asian region, but it faces challenges when it comes to capitalising on arrivals volume. Though it attracted just over half as many visitors, Singapore generated similar revenue from its tourism sector, while Thailand received almost 3m fewer visitors than Malaysia in 2012, but earned 50% more from them, according to UNWTO data.

This suggests that Malaysia needs to do more to encourage greater spending by tourists. The country may also need to look further afield when expanding its client base, with around 75% of all arrivals coming from neighbouring states such as Singapore, Indonesia, Thailand, Brunei and the Philippines, with Singaporeans making up well over one-third of all arrivals.

One of Malaysia’s appeals as a tourism destination for fellow members of the ASEAN bloc is its proximity, Tan Kok Liang, a vice-president of the Malaysian Association of Tour and Travel Agents, told the local press on August 6. By not having to endure long-haul flights, ASEAN visitors can easily take short breaks in Malaysia, he said. However, Tan also acknowledged that the predominance of tourists from nearby countries also has a downside.

“Because many of these are still developing countries, tourists’ purchasing power will be lower than those from developed countries,” he said.

One answer to the comparatively low per-capita earnings power of the Malaysian tourism industry is to develop high-spending niche markets. On August 15, Prime Minister Najib Razak told delegates attending an international insurance congress in Kuala Lumpur that such events would become increasingly important for the tourism industry. Najib said inbound business tourist numbers are set to rise from the present level of 1.2m to 2.9m by 2020, with the government’s Malaysia Convention and Exhibition Bureau aiming to have the country recognised as a leading business destination.

Other niche segments that have been targeted under the government’s development programme are medical, spa and wellness tourism, as well as shopping and duty free sales, though regional rivals are also offering similar projects, potentially narrowing the scope for Malaysia to fully capitalise on these markets.

Despite strong government support and a solid improvement in arrivals this year – inbound tourists numbered 6.5m for the first quarter of 2013, compared to 5.5m for the same three months last year – it may be difficult to achieve some of the goals set by the state, which has identified the sector as one of its 12 National Key Economic Areas. Tourism Malaysia, the agency tasked with promoting the country as a travel destination, has targeted 26.8m inbound visitors this year and 28m in 2014, rising to 36m by 2020.

In the shorter term, the slowing of the economy in China – the third-largest source market for Malaysia – could have a negative impact on the sector, both in terms of a reduction in the number of Chinese visitors as well as any knock-on effects on regional economies. Further down the track, the increased competition posed by other south-east Asian nations could also cut into Malaysia’s tourism growth unless it is able to broaden its appeal.

Automotive sales in Malaysia slipped down a gear in the second quarter, with both April and May showing a deceleration in the figures, though experts believe activity in the industry will pick up in the latter half of the year after the government unveils a new policy aimed at reducing vehicle price tags.

On June 18 the Malaysian Automotive Association (MAA) report on May vehicle sales showed a 5.4% drop in roll-outs from dealers’ lots compared to the previous month, which had also seen a decline in sales. The report said there had been a 15% dip in trade year-on-year for May, though 2012 had set the bar high, with record sales of 627,753 units for the full year.

While the April and May figures were down on the corresponding months in 2012, overall sales are up 6.2% for the first five months of the year, with just under 260,000 units sold compared to 244,000 over the same period in 2012. This was thanks to a strong performance in the first quarter, the MAA report said. The association noted that, despite uncertainties in the market, it expected year-end sales to top 640,000 units.

One of the key reasons given by analysts for the easing sales figures is a wait-and-see approach adopted by potential car buyers stemming from a promise made by the government in the lead-up to the recent national elections to reduce vehicle prices by 20-30% over the coming five years. This commitment was repeated by Prime Minister Najib Razak at the end of May, three weeks after the polls closed.

While the government has reiterated its promise to lower vehicle costs, it has not made clear how it will do so. The government has said the price cuts will stem from a revision of the National Automotive Policy (NAP), the blueprint for the direction of the industry first drafted in 2009 and amended last year. The NAP aims to boost competitiveness and liberalise the sector in the lead-up to the ASEAN Economic Community launch in 2015, when most of the region’s tariff borders will be removed.

The revised version of the NAP is due to be released some time in the third quarter, after it is reviewed by the Cabinet, by which time producers and dealers hope there will be more clarity over how the cuts will be achieved. The government is reluctant to reduce its automotive taxes at a time when it is trying to narrow the state deficit to 4% in 2013 from last year’s 4.5%, and down to 3% in 2015.

Trade Minister Mustapa Mohamed said on June 24 it was impossible for the government to cut the automotive excise tax, which brings in RM7bn ($2.18bn) to the Treasury annually.

“Our budget is in deficit,” Mustapa said. “If we sacrifice RM7bn, where are we going to find it? At this point of time, it is not something the government is considering.”

If this position is maintained, it would appear to limit options on how to reduce costs for the consumer, though the NAP may open up new avenues and help stimulate sales when released.

Another reason given for the slowdown has been weaker consumer sentiment, a reflection of concerns the Malaysian economy may be cooling. On June 24 OCBC Bank lowered its forecast for economic growth to 5% for this year, a reduction from its earlier estimate of 5.4%. The bank’s projection was in line with that of other analysts, who have tipped GDP expansion of between 4.5% and 5.5%, down from last year’s 5.6%. If the economy does move towards the lower end of market expectations, this may curb Malaysians’ appetite for new vehicles, at least until the position on new tariffs is made clear.

While there may be some uncertainty hovering over the immediate situation of the sector, a number of foreign manufacturers appear to be taking a positive position on its longer-term prospects. Chinese manufacturer Chery has announced it intends to set up a production plant in Malaysia, targeting both the domestic market and using it as a stepping stone into the region. Japanese rival Mazda has also unveiled plans to spend some $30m to expand its production capacity through acquiring an existing facility and constructing a new factory.

Another seeing improved potential in the Malaysian market is German carmaker BMW, which is targeting a 10% increase in sales in 2013 over last year’s 7000 units. The manufacturer reported in early June that sales for the first four months of the year were up by 5%, with hopes a new release of the Mini Cooper would push them even higher.

Some producers, including local manufacturer Proton, moved to lower the prices on some vehicles, though this can be linked to marketing pressures to increase sales and promotional activity leading into Ramadan, the end of which is traditionally linked with higher consumer spending, Malaysia’s carmakers may overall also adopt a wait and see attitude to pricing until after the NAP is rolled out.

A gradually improving economic climate is expected to support continued retail growth in Malaysia in 2013. However, downside risks from the international environment and political uncertainty may affect economic expansion before the year is through.

In January, local press reports suggested the retail market would grow by 5-6% this year. The sector is expected to track or even outstrip broader economic growth, which official estimates suggest will come in at 4.5-5.5%.

Retail Group Malaysia, a local retail consulting firm, said in a recent report the sector would grow by 6% in 2013, following growth of 6.9%, 5.9%, 4.8% and 5.7% in the four quarters of 2012. The organisation said the market would receive a fillip in the first quarter of 2013 from the second round of the government’s 1Malaysia People’s Aid (Bantuan Raykat), which began in January.

Segments that are expected to benefit include electrical and electronics, largely due to a RM200 ($65) rebate on smartphone purchases for 21-30-year-olds who have monthly incomes that do not exceed RM3000 ($965); and bookshops capitalising on the RM250 ($80) book tokens to be given to all university students.

Spending associated with Chinese New Year should also have provided another boost at the beginning of 2013. Retailers often offer promotions during the holiday period, adding momentum during what is already a busy time of year. However, the holiday is usually followed by a dip in sales.

At the beginning of the year, Yen Global, a Malaysian clothes manufacturer, wholesaler and retailer, said the fashion and lifestyle segment had grown by a “modest” 5% in 2012. However, the company considers the outlook good enough to undertake significant investments in expansion, extending its branch network, revamping its products and providing incentives for frontline staff.

“Retail companies that want to chart a growth path will need to expand cautiously, and with the right timing and location in order to rise above the competition,” said Goh Kok Beng, executive chairman of Yen Global, in the company’s annual report.

Similarly, CapitaMalls Malaysia Trust, a real estate investment trust, said in January that it was continuing to look into mall acquisitions, expecting 6% retail growth in 2013 after a successful 2012. The fund focuses on suburban “neighbourhood” malls in which people do day-to-day shopping, a model that has become increasingly popular in recent years as the “destination mall” market has become more saturated.

The single-biggest reason for optimism among retailers, wholesalers and mall investors is Malaysia’s continued strong economic performance, despite a difficult international situation coloured by the eurozone crisis and the US’s debt troubles. Consumer confidence is currently at a two-year high. Momentum is being maintained by a variety of factors, including high prices for Malaysia’s commodity exports, but more importantly, domestic demand supported by investment, a favourable interest rate environment and low inflation.

Public and private investments under the Economic Transformation Programme (ETP), which seeks to boost value-added in the economy and put the private sector at the forefront of growth, is particularly important. The ETP, which involves a raft of investments and reforms, is being rolled out through to 2020 as part of Malaysia’s ambition to become a high-income country by the end of the decade.

Meanwhile, inflation in 2012 averaged 1.6%, half the level recorded in 2011. Analyst surveys forecast that the central bank will keep rates on hold until the second half of the year.

While these factors mean there is good reason to be upbeat about the outlook, there are a number of downside risks to take into account. First and foremost is the broader economy, which could take a hit if the global situation worsens. Significant softening in commodity prices, a worsening in the eurozone crisis affecting the international economy or other unforeseen challenges (such as an oil price spike caused by conflict in the Middle East) could all cool growth in Malaysia.

Another factor that retailers are taking into account is the general election, which is expected by June. Opinion is divided about the impact of the run-up to the poll on the sector; while some expect there to be little effect, others are already reporting a degree of caution among shoppers, particularly regarding big-ticket purchases. Depending on the result of the election, uncertainty after the vote could cause both investor and customer sentiment to dip.

The Malaysian retail sector performed well in 2012, and looks set for another good year in 2013. However, a number of factors, both internal and external, could have a dramatic impact on growth as the year unfolds.